Land is considered as a Capital asset for the purpose of Income tax act. Whether you hold the land as an investment, it is gifted to you or it’s acquired in inheritance, the gain arising on its sale or transfer is considered as Capital Gain. Agricultural land in India in not considered as Capital asset, so capital gains arising on sale of agriculture land is not taxed. The word ‘Gain’ here includes ‘Loss’ also. Capital Loss can be carried forward or set off if Capital gain is taxable. If Capital Gain is not taxable then Capital Loss is not allowed to be carried forward or set off for instance – Capital loss in case of agricultural land
Classification- Capital Gain on sale of land is classified into ‘Short Term Capital Gain’ (STCG) and ‘Long term Capital Gain’ (LTCG) .Classification into STCG and LTCG depends on the holding period of the land.
If land is held for 24 months or less than 24 months then Capital Gain arising on sale is Short Term
If land is held for more than 24 months then Capital Gain arising on sale is Long Term
Calculation- Cost of purchase, cost of improvement and expenses related to sale/ transfer is deducted from Sale Price in calculating Long term and Short term capital gain. But in Long term capital gain -cost of purchase and cost of improvement will be adjusted for inflation factor and therefore Indexed Cost of Purchase and Indexed Cost of Acquisition is deducted from Sale price
Short term Capital tax is calculated as
Long term Capital Gain is calculated as
Taxation- Short term capital gain on sale of Land is added to income and taxed as per applicable Slab rate.Long term Capital Gain on sale of land is taxed at flat rate of 20%.
Exemptions- No exemption is available if Land sold is Short Term Capital asset. One can save tax on Long term capital gain on sale of land by availing the following exemptions
Sec 54EC- Invest in notified bonds within six months from the date of transfer of Land. Exemption is equivalent to amount invested or Capital Gain whichever is lower. It means even if you invest more max exemption is limited to amount of Capital Gain. There is a restriction on transfer of these bonds or taking loan against them for a period of five years. If this is done then Capital Gain becomes taxable. Maximum Investment allowed is Rs.50 lakhs
Sec 54F- This exemption is available if the assesse is having only one house property. Exemption is available if the sale proceeds of land are used to buy a new residential house property in India or for construction of new residential house property in India. If part sale proceeds are used, then deduction will be in proportion of the invested amount to the sale price. The new residential house should be bought within 1 year before or 2 years from the date sale of land. In case of construction it should be completed within 3 years from the date of sale of land. There are restrictions regarding – (i) sale of this new house property within 3 years (ii) purchase or construction of additional house property within 2 years and 3 years respectively from the date of sale of land. In case of violation of these restrictions, exemption availed becomes taxable